Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 4, 2003
The bull market in cattle got some new support from recent reports. The January 31 Cattle Inventory report showed we have gone through seven consecutive years with decreased inventory numbers. The total numbers were down 1 percent from a year ago. This is the smallest total inventory of 96.1 million head since 1990, and there are reports (and I have not confirmed these) that the report indicates the smallest calf crop since 1951. Combined with that long-term bullish scenario from the supply-side cycle, we have 7 percent fewer cattle on feed and the carcass weights for steers and heifers are finally down to year-ago levels and feedlots are current. Cash cattle sold at $79-$80 as last week closed, with a lot of the cattle at $80, and there is widespread anticipation that we will see an $81, possibly an $82, market possibly this week. Cutout values for the lighter Choice boxed beef that had backed off from recent highs above $135 reported Tuesday morning at $130.72, up 92 cents. All of these things indicate that we will be involved in an upward trending market for some time to come. The February live cattle futures are making new highs above $82, and that is pulling the April up to its old contract highs around $80. It is hard for me to pass up the opportunity to recommend pricing cattle at the $80 level, so I would be inclined to sell the April futures in the $79.90-$79.95 area. I don't see, fundamentally speaking, much if any upside from here. Later contracts, such as the June and further out, also deserve attention, but they are trading at sharply lower levels. I think the discounts we are seeing in those contracts are excessive, and we will see better opportunities on the June and August contracts later.
The feeder cattle market is not moving up in lockstep with live cattle, but I am bullish in this market longer term. I expect to see a huge corn crop this year and if we can get back to where the feedyards are making some money on cattle being sold in the first half of this year, we could see $90 on these yearling cattle before summer. I would be inclined to watch the March as the indicator, and we can sketch a downtrend line on that contract across the late 2002 highs at $83 and last week's highs around $79.50. When we see a close above that downtrend line, I would buy May and August feeder cattle futures to place long hedges. With lower prices on Tuesday, we are also seeing a chance to buy March across its recent lows near $78. Obviously, this is also an opportunity for those who are holding short hedges on March, May, and even summer feeder cattle to think about buying back those short hedges if you are comfortable acting as a selective hedger in these markets.
The January 31 monthly Hogs and Pigs report brought possible indications of some expansion, and the market didn't particularly like what it saw. These markets had traded down hard in Monday's session with some of the contracts trading limit-down during the day. But then the closes on anything June and farther out were back in the middle of the trading range for the day, so that was encouraging. I would continue to be inclined to sell these markets on rallies to recent highs. The February contract has highs under $53 from early January that I think will constitute significant resistance, and the contract highs, which occurred back in December, are not much above that level. I would key off that contract and watch opportunities in the April, June, and summer contracts as well, but I think this is a market that will be helped in terms of rallies to the upside by cattle. On the other hand, we have hogs priced so much below the $80 cash cattle market that the $35 cash live-based prices on hogs will be a constraining influence on the cattle sector. So I am very much inclined to sell rallies to recent highs in this market to place short hedges and lock in at least something like a breakeven as we move out through the year, depending on cost of production. Keep in mind that I am inclined to think about this as a selective hedging viewpoint, so any short hedges that are placed can be bought back if we get some significant price dips in lean hogs futures and then let the market rally again to place the short hedges. That is easier said than done, of course, but it makes sense to me in that it allows us to manage exposure to the markets and not get locked into risk-reducing strategies that take away the benefits of unexpected price surges.
The corn market seems to be caught in a sideways trading range with the March trading in the $2.30s and the new-crop December showing only a modest premium to that level and trading basically in the low $2.40s across the past several trading days. Some of the short-term technical indicators have turned up in this market, and the first upside objective that I see would be the early January high up around $2.47 on that December. I am not suggesting that we won't see better opportunities longer term in this market, but I would look at selling that rally in the short term with the expectation that until we move further in the year and get information on planted acreage, etc., the market is likely to trade back down from those levels and give us an opportunity to manage exposure as a selective hedger in this market. Longer term, I see no fundamental reason why we shouldn't see a huge corn acreage and a huge crop with low prices. There are enough incentives in the new farm program to keep even the marginal acres of production in corn since the program guarantees revenues that are likely to exceed everybody's out-of-pocket cost of producing a crop. I would continue to look at selling rallies in this market and only place long hedges on dips back to the lows.
The soybean market has an eye on South America where they are approaching harvest. Generally across the past week to 10 days, the weather in South America has improved in terms of crop conditions. As always, the reports on Tuesday morning are that some areas are still hot and dry and others have received rain. I would watch for rallies in this market back toward the highs from about one week to 10 days back as a possible opportunity to sell old-crop product and replace or place some short hedges in the new-crop November. We have a high at about $5.33 that was put in a few days back that I think will constitute considerable resistance, and we may see selling action around that level start to push the market back down toward the recent $5.03-$5.05 lows in the November. The soybean charts look a little better than corn, but we need more aggressive buying action than we have seen recently to push these markets up and give better hedging opportunities.
In wheat, conditions in the winter wheat growing areas are very uneven, and that is tending to pop the market a bit above recent lows. March in Chicago is trading up to about the $3.25 level after spending two to three weeks choppy in the $3.10-$3.20 area. The July in Chicago is trying to trade higher in early-week trade. We have some highs there just below $3.25, and this is a tight trading range, but I would be inclined to sell rallies to those levels. You need to look at what you can get for old-crop at the same time, especially if you have seen basis improvement while you have held wheat in storage. The patterns on the Kansas City contracts look only slightly different. They dipped below $3.25 recently after we got the report of an 8 percent increase in planted acreage in the winter wheats. We have highs on that July from late December that are near $3.50, and I would be inclined to look at the bids on old-crop wheat you are holding and placing or replacing short hedges on this contract at those levels. I had encouraged getting wheat priced back across the last several months, and I trust there is considerable protection at substantially higher levels. These modest rallies toward recent highs would be just the chance to replace some of the short hedges that have been lifted or get some protection in place if you have none.
